Options for raising revenue
Stuart Adam
Howard Reed
Outline
• Income tax and National Insurance
• Fiscal drag
• Changing thresholds
• Increasing rates
• VAT
• Increasing rates
• Widening base
• Excise duties
Changing distribution of taxpayers
35
30
Millions
25
20
15
10
5
0
1990
1992
1994
Starting
1996
Basic
1998
2000
Higher
2002
Fiscal drag in the future
Number of higher-rate income taxpayers
6
Millions
5
4
3
2
1
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Historical
Earnings indexation
Price indexation
Freezing
Fiscal drag in the future
Revenue effects in 2009-10 of different uprating options for
income tax and National Insurance
Relative to price-indexation:
• Earnings-indexation would cost £7.2 bn
• Freezing would raise £8.8 bn
Fiscal drag in the future
Distributional effect in 2009-10 of freezing income tax
and NI thresholds from 2005-06 to 2009-10
-0.5
-1.0
-1.5
-2.0
9
Ri
ch
es
t
8
7
6
5
4
3
2
or
es
t
-2.5
Po
% change in income
0.0
Changing thresholds
• Freeze personal allowance and NI earnings threshold
• Raises £1.3 bn
• Hits those on middle incomes hardest
• Align UEL and basic rate limit
• Raises between £1 bn and £3 bn
• Very progressive
• Abolish UEL
• Raises £7.5 bn
• Extremely progressive
Changing rates
• Income tax or National Insurance?
• Increase all employee and self-employed NI rates
• 1% raises £4.4 bn
• Fairly progressive
Changing rates
Increases in employee and self-employed NICs
-0.5
-1.0
-1.5
-2.0
-2.5
1% rise in all rates
9
Ri
ch
es
t
8
7
6
5
4
3
2
or
es
t
-3.0
Po
% change in income
0.0
Changing rates
• Income tax or National Insurance?
• Increase all employee and self-employed NI rates
• 1% raises £4.4 bn
• Fairly progressive
• Increase rate above UEL
• 5% raises £4.2 bn
• Extremely progressive
Changing rates
Increases in employee and self-employed NICs
-0.5
-1.0
-1.5
-2.0
-2.5
1% rise in all rates
5% rise above UEL
9
Ri
ch
es
t
8
7
6
5
4
3
2
or
es
t
-3.0
Po
% change in income
0.0
VAT
1% rise in the main rate
-0.2
-0.4
-0.6
-0.8
-1.0
-1.2
-1.4
9
Ri
ch
es
t
8
7
6
5
4
3
2
or
es
t
-1.6
Po
% change in income
0.0
VAT
• Increase main rate
• 1% raises £4 bn
• Seems to hit the poor hardest
• But may be misleading
• Widen base
• Putting VAT on food raises £10 bn
• Seems to hit the poor hardest
• But may be misleading
Distributional goals?
Zero-rating compared with other uses of the money
1.5
1.0
0.5
Children's clothes
t
ch
es
9
Ri
8
7
6
5
4
3
2
st
0.0
Po
or
e
% change in income
2.0
Child benefit
Child tax credit
Excise duties
• Political sensitivity
• How much can they raise?
• Additional revenue from fuel and tobacco
rises tied up
Conclusions
• Fiscal drag can do much, but operates slowly and is
already built into revenue forecasts
• Excise duties limited revenue-raising capacity and
politically difficult
• VAT historically rare and thought unfair to poor
• Income tax and NI most likely source:
• Income tax rates restricted by pledges
• Freeze tax-free allowances?
• Increase NI rate above UEL?
• Align UEL and basic rate limit?